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Dollar plunges as China’s factories slow down

Bianca Hartge-Hazelman

The Australian dollar has dropped about half a cent after a new report signalled a slowdown in Chinese factory activity, taking the currency back to levels it was trading at before Wednesday’s strong local inflation data.

The local currency fell 0.5 per cent to US87.92¢ from a daily trading high of US88.47¢ in a matter of minutes just after 12:45pm AEDT, after China’s flash Markit/HSBC Purchasing Managers’ Index (PMI) fell to 49.6 in January from December’s final reading of 50.5. A drop below 50 signals a slowdown, whilst above that is an indication of expansion.

The dollar had risen by a similar amount yesterday in the wake of the release of stronger than expected local quarterly inflation data.

“This implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth. As inflation is not a concern, the policy focus should tilt towards supporting growth to avoid repeating growth deceleration seen in the first half of 2013.”

Today’s report, known as the Flash PMI, is based on 85 per cent to 90 per cent of responses to surveys sent to more than 420 manufacturers. The final reading will be released on Jan. 30.

The $A has also hit nearly a 5 ½-year year low against the pound and some investment experts expect the trend to continue as the UK economic recovery gathers strength.

The local currency is trading at £0.553, nearly 12 per cent lower than where it was six months again and at the same level it was trading at in September 2009.

By contrast, the Australian dollar is down about 5 per cent over the past six months and at its lowest trading point since September 2010.

Tracey McNaughton, head of investment strategy at UBS Global Asset Management, said the gradual decline of the Australian dollar partly reflects expectations that growth in the US, Britain, Europe and Japan will be a lot stronger this year and will drive overall gloibal growth.

Australian growth however is expected to remain below trend.

“While not completely stuck in the mud, the outlook is for Australian growth is soggy as the hole left by the decline in mining activity is only partially filled with housing, exports and a recovery in consumer spending,” McNaughton wrote.

“A weaker Aussie dollar will help ease financial conditions, but a soft labour market is undermining confidence. A recovery in global growth prospects should help lift spirits, however.”

She added that China’s transition away from growth being led by investment toward consumption-led growth would continue this year. “While the rise in wages is undermining its manufacturing cost competitiveness, it is supporting the rise of the Chinese consumer. China’s average manufacturing wages are now more than three times higher than Indonesia and Vietnam.”